Did you know a simple bank deposit could cost you a chunk of your assets in a divorce? Let’s dive into a legally dense topic that leaves many people confused–commingling. In the context of family law, commingling is the mixing of separate and community funds. Among the many factors that come into play, the concept of “commingling” holds significant importance, especially when it comes to the division of assets.
What is commingling, and how does it happen?
What exactly is commingling in the realm of family law? Commingling refers to the blending of separate property with marital/community property during marriage. Couples often combine their assets during their union, whether intentionally or unintentionally. The occurrence of commingling varies based on state laws and can manifest in several ways, including:
Commingling by adding an owner
For instance, adding a spouse as a joint owner to a piece of property that was originally separate (e.g., making your spouse a joint owner of real estate that was initially your separate property).
Commingling by combining property
Another scenario involves merging separate funds (i.e., income from a separate property source or premarital funds) with joint property (i.e., employment income earned during marriage).
Commingling by making joint purchases
Couples may also commingle by jointly purchasing a new property using both separate and marital/community funds. An example is buying a boat together with a combination of individual and joint funds.
Commingling becomes problematic in divorce proceedings when it alters the characterization of property. In most cases, marital/community funds are divided equally between parties. However, when those funds are commingled with separate property funds, it becomes a harder process to divide that asset. In order to do so, a court, with the help of forensic accountants, must conduct a tracing to analyze what is marital/community and what is separate. But, if it is difficult to trace back what is separate property, a court may simply declare that it is entirely marital/community property.
What is an example of commingling?
Let’s use an example to demonstrate how commingling works in real life and how it can impact your assets in a divorce. The following example deals with commingling real estate funds, but there are plenty of other ways commingling can occur.
- Background: Nancy owns a real estate rental property before marriage. The income should be hers alone. However, she deposits some of the rental income funds into a joint account with John, where it mixes with shared funds.
- The Problem: This blurs the line between separate and marital property (i.e., commingling). In a divorce, courts may struggle to untangle the funds that have been mixed together.
- Potential Outcome: Nancy could lose ownership of some of her rental income as a result if the court is unable to untangle which funds were from the rental income and which were shared funds separate from it.
Commingling assets, such as real estate rental income, can make it difficult to argue that those mixed funds are actually your separate property.
What happens in a divorce if you commingle assets?
Commingling can have significant implications during divorce proceedings. Essentially, property that you previously thought was separate property can become marital/community property, subject to division. In plain English, if you commingle, you can lose the property you previously thought was yours only. Courts aim to distribute assets fairly, but the commingling of separate and marital/community property often complicates this process by being unable to untangle the funds and categorize them correctly.
6 tips on preventing commingling
Okay, so we’ve covered defining commingling and its implications in the divorce process. Let’s talk about how you can avoid commingling.
Prevention Tip #1: Maintain separate accounts
Keeping separate bank accounts for separate property assets and utilizing joint accounts for marital funds can help maintain financial clarity. For example, if you want to keep certain real estate income separate property, you should ensure those funds go into a separate bank account. Any money you deposit into a joint account could be considered marital funds one day, even though that was not the intention.
Prevention Tip #2: Define financial responsibilities
Clearly outline who is responsible for specific financial aspects, such as bill payments, savings goals, and investment decisions. Having defined roles helps prevent unintentional commingling.
Prevention Tip #3: Keep accurate financial records
Keep accurate financial records and/or hire an accountant to maintain accurate records of your finances. Regularly reconcile accounts to identify and rectify any instances of commingling.
Prevention Tip #4: Documenting contributions
Explicitly documenting any contributions of separate property to joint assets can serve as evidence during divorce proceedings. For instance, putting intentions in writing for what the contribution is for, who it came from, and what the goal is.
Prevention Tip #5: Don’t add partners to separate property
Make sure to keep property that you want to remain separate in the name of one person. For example, you wouldn’t want to add a spouse to a property deed if you intend to keep that property separate in the event of a divorce.
Prevention Tip #6: Get a prenuptial agreement
Creating a comprehensive prenuptial agreement is a proactive way to address commingling concerns and protect individual assets. Through a prenup, you can outline exactly what intends to remain separate and what is marital/community, so you know what can and cannot be commingled. Your prenup can also provide for how separate property contributions to a joint account will or will not be reimbursable, as well as provisions on how separate property may be traced in order to preserve its characterization.
Final thoughts on commingling and its impact
In conclusion, understanding the concept of commingling is crucial for individuals getting married. With a simple bank deposit, you could lose funds that you meant to keep separate. By being aware of how assets may become commingled (making purchases together, mixing funds, or adding an owner), couples can take proactive steps to protect their separate property and promote a smoother resolution in the event of divorce. Co-create your future & protect your ass(ets) with a prenup today!
Raymond Hekmat’s practice of law has been devoted exclusively to areas of California family law focusing on prenuptial agreements, divorce consulting and mediation, since earning his Juris Doctorate degree from Loyola Law School in 2009. During his tenure at Loyola, Raymond was President of the Evening Bar Association, and was awarded the Alumni Association Governors’ Alumni Award. While earning his degree, Raymond worked as a law clerk, and later an associate, for a Beverly Hills family law firm. Prior to founding HLM, Raymond’s practice involved complex family law litigation involving high-asset property division, complex custody litigation, jurisdictional issues, division of community estates and prenuptial agreements.
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